Why the RBA is worried about mortgages

A perfect storm of market conditions is causing concern for the central bank that investors and homeowners may be forced to sell up or default on loan payments.

In an address earlier this week, RBA assistant governor Michele Bullock flagged the risks associated with high levels of household debt, pointing to Australia’s debt-to-income ratio of 190 per cent, compared with the global median of 130 per cent.

Ms Bullock claimed that the rise in household debt has been “largely driven” by a rise in mortgage debt, partly due to household ownership of rental stock.

Ms Bullock added that continually high levels of household debt could pose “credit quality issues” that could raise vulnerabilities for both banks and borrowers.

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“[Mortgage] lending is such an important part of bank balance sheets in Australia, [so] any difficulties in the residential mortgage market could translate to credit quality issues for banks,” Ms Bullock said.

“Australian banks have substantially increased their exposure to housing over this period and housing credit now accounts for over 60 per cent of banks’ loans.

“So, the Australian banking system is potentially very exposed to a decline in credit quality of outstanding mortgages.”

Despite acknowledging that arrears rates on mortgages “remain very low”, Ms Bullock warned that high household exposure to mortgage debt could heighten mortgage serviceability pressures in the event of an economic event.

“If they [households] have little savings, they might need to reduce consumption in order to meet loan repayments or, more extreme, sell their houses or default on their loans,” the RBA governor added.

“This could have adverse effects on the real economy – for example, in the form of lower economic growth, higher unemployment and falling house prices, which could, in turn, amplify the negative shock.”

Ms Bullock noted that mortgage “buffers” created off the back of low interest rates and mortgage offset accounts could help reduce such risk, but claimed that “risks nevertheless remain high”.